ECONOMIC & SOCIAL CONSULTANT

A World of Milk

Until the end of March, EU farmers could only produce a certain amount of milk. And then the quotas were lifted. Efficient farmers were overjoyed. It meant they could produce as much as they wanted and bask in greater profits.

But almost as soon as that happened, milk prices began to plummet. From a high of 39c per litre of milk in 2014, farmers this year faced a low of 26c per litre, a fall of 33%.

And farmers are angry, not just about milk prices but falling profits in general. In early September, thousands drove their tractors to Brussels and faced down 3,000 riot police. The protesters caused major traffic problems, set bales alight, and sprayed the police with milk.

And what has been driving the collapse in prices is interesting.

Firstly, Russia has had a ban on imports of dairy products from the EU since August 2014, in response to EU sanctions on Russia which were in response to Russia's annexation of Crimea from Ukraine. Thus the Russian import ban has removed demand there.

Secondly, China wants less milk and wants a lower price for the milk it does want. Why? Well it wants less because it built up excess in 2014 and now the economy is slowing down; and it wants a lower price because the current price was negotiated when China was desperate in 2013, which was when it stalled milk imports from New Zealand when some were found to be contaminated.

Thirdly, good weather in The US in 2014 led to better crop yields and lower feed costs there. This helped increase milk production and decrease price. So the US has been able to supply itself better and so demand there has fallen.

So a war in Ukraine, bacteria in New Zealand, and temperatures in Texas have all led to European dairy farmers feeling the pinch. And that pinch is stark. A very efficient farmer in Ireland can produce for 20c a litre and an average yield is about 14 litres per cow per day. So in 2014 an efficient farmer was earning €2.66 per cow per day, and in 2015 he or she was earning as low as €0.84 per cow per day. Less efficient farmers were obviously earning less.

Farmers' groups wanted the EU to increase the price at which it intervenes in the market, which is 21c per litre since 2009. But price intervention would be a mistake because it would set a precedent. Instead, the EU is giving out €500m in aid. But this is simply intervention by another name and which of course naturally sets a precedent. That precedent is that the rewards for better efficiency and innovation are smaller. Why get up at 5 if you know your neighbour gets up at 8 for the same income?

Efficient farmers do not want intervention. They argue the market should be allowed bottom out. This has happened this year and prices are rising. The market has corrected itself. But still the EU is giving out aid. It shouldn't. Efficiency needs to be rewarded.

So the takeaway point is how small changes in other regions can have profound changes in ours. And how policy should acknowledge that. And how protectionism is naive.

Our globalized world fits in a milk carton: something to think about when pouring your tea.